GDP growth to moderate in second half of '07

PTISep 19, 2007, 03.45pm IST

NEW DELHI: The Reserve Bank's tight monetary policy is likely to moderate the growth rate of Indian economy in the second half of the current calendar year, the economic analysis arm of international rating agency Moody's has said.

"Real GDP is expected to moderate in the second half of 2007 as tighter monetary conditions dampen the demand for credit and take some of the steam out of consumer spending," Moody's Economy.com said in its report.

Although India is expected to maintain a strong growth momentum over the forecast horizon, it will not match the 9 per cent plus expansion witnessed in recent years, the report, "India Outlook: The Elephant's Charge Expected to Slow", said.

Indian economy, Asia's fourth largest, grew at a rapid pace of 9.3 per cent during April-June of 2007 after a 9.4 per cent expansion in the entire 2006-07, according to government's estimates. However, many economists and analysts expect growth rate to slow down to 8.5-9 per cent in subsequent quarters.

Early indications already point out to a moderation with industrial production, which accounts for one-sixth of the GDP, slowing down to 7.1 per cent in July.

Moody's said India's booming real estate market is also expected to weather the recent financial market storms and report solid growth through the second half of the year as the sector reportedly has very little direct exposure to the US subprime mortgage market.

In addition, foreign direct investment flows into infrastructure development projects are expected to remain strong. This means the construction sector will also continue to expand at a robust pace, it said.

Moody's Economy.com said even though a lot has been achieved since India embarked on its programme of economic reforms over a decade ago, a myriad of political, demographic and economic issues still need to be addressed.

Despite the government's efforts to deregulate trade and investment, ongoing restrictions on foreign investment flows continue to hamstring competition and innovation in a range of key industries.

"Although Prime Minister Manmohan Singh's government remains committed to liberalisation and economic reform, much more work still needs to be done to open a range of key industries to foreign investment," it said.

It is vitally important for the government to accelerate its liberalisation programme and maintain strict fiscal discipline in order to provide a stable economic environment and encourage growth, the report said.